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As we explained in our Jan. 9 cover story, "Broken Forever?" the Securities and Exchange Commission has floated some fairly significant—and, to most in the industry, highly alarming—proposals for money-fund regulation. On the table, in brief: Ditching the steady $1-per-share convention in favor of a floating net asset value, mandating a capital reserve for each fund, and creating a "hold-back" that would mean you'd have to wait 30 days to receive a portion of your withdrawal.

The SEC hasn't announced anything publicly, but in informal talks with the Investment Company Institute and others, the agency has indicated that its timeline for releasing these new rules has moved up from "sometime in the first half of the year" to "could be March." This, of course, could change again. But the behind-the-scenes discussions we reported on a month ago are now much more public.

"If money-market funds get broken, it's because regulators broke them," says J. Christopher Donahue, CEO of Federated Investors, which manages $285 billion in money-fund assets, more than 10% of the $2.7 trillion industry. "These proposals are just various forms of death and destruction. I don't know how you negotiate this."

And that's a big part of the problem, and what makes this battle unusual. The industry says it's been kept in the dark as these proposals have evolved. In fact, headlines insisting that the SEC has "set" a plan, or that the industry has "rejected" an SEC plan, imply much more of a dialogue than has actually happened.

"They're not engaging us very well in the discussion," says Robert Deutsch, head of global liquidity for JPMorgan, which has $265 billion in money-fund assets. "If you look at past reform, there's been much better communication."

The SEC declined to comment on a time frame or any specifics of the proposal.

The SEC's aim is to improve the resiliency of money-market funds. Clearly, it wants to prevent panics like the one that occurred after the Lehman Brothers bankruptcy in 2008— pushing funds toward breaking the buck and driving potentially rampant withdrawals.

A capital buffer, for instance, which would presumably help on this front, sounds like a good idea. But the SEC hasn't yet announced how much money fund sponsors will have to hold in reserve—1%? 3%?—or where that money will come from, or how long funds will have to accumulate that reserve.

With the average money fund offering 0.02% in yield, taking it out of its "return" would send even more shareholders in search of alternatives. In the last two years, money-fund assets shrank by 20%, or $613 billion, as Federal Deposit Insurance Corp.-insured money-market deposit accounts saw inflows of $1.2 trillion.

The biggest firms could theoretically fund the capital reserve out of their corporate profits, but "it's difficult to imagine why any firm would use billions of capital for zero return," Deutsch says.

Nor is it at all clear how the move to a floating NAV would work. There are accounting, tax and investment-policy complications that would need to be ironed out. Would money-fund shareholders—that is, virtually all investors—have to track capital gains in their money fund every time they write a check? How would a 3% or 5% hold-back affect check-writing?

What irks the industry the most is the sense that new regulations that increased liquidity, credit standards and transparency were just put into effect in 2010. "That's the reason money-market funds were able to withstand the volatility and other problems of the past year or so," says ICI president and CEO Paul Stevens.

We're still a long way from any resolution. Three out of five SEC commissioners must first vote in favor even to propose the regulations, which will then be published for public comment for at least 60 days. After sifting through the comments, the SEC will then make a judgment as to how it wants to proceed. Stay tuned.

-- Beverly Goodman

Diamond Foods Cracks on Accounting Woes

At the 47th Annual Colusa Farm Show on Wednesday, smartphones buzzed with news that
Diamond Foodsdmnd -0.9636767976278725%Diamond Foods Inc.U.S.: NasdaqUSD26.72
-0.26-0.9636767976278725%
/Date(1425412851617-0600)/
Volume (Delayed 15m)
:
113399
P/E Ratio
N/AMarket Cap
847603675.499267
Dividend Yield
N/ARev. per Employee
506736More quote details and news »dmndinYour ValueYour ChangeShort position
had acknowledged misaccounting for payments to the walnut growers whose farms fill Colusa County in northern California. Complaints from growers were the seeds of Wednesday's announcement that Diamond will replace its chief executive and chief financial officer, and restate financial results for 2010 and 2011. Shares of the San Francisco-based company (ticker: DMND) opened Thursday morning at $21.79, down 40%, and finished the week at $23.52.

Every conversation at the Colusa show started with the subject of Diamond, says Pat Mecklenburg, a partner in the walnut-producer Derby Orchards. She laments that Diamond's troubles have hurt the hard-working farmers and employees who've held Diamond shares since it converted from a growers' cooperative to a publicly held company in pursuit of the empire-building dreams of now-deposed CEO Michael Mendes. "People I know have lost a ton of money," says Mecklenburg. "Just because someone gets a little overambitious, lots of people get hurt in the process."

Diamond is now unlikely to complete the acquisition of Pringles snack products from
Procter & GamblePG -0.4097880810209577%Procter & Gamble Co.U.S.: NYSEUSD85.06
-0.35-0.4097880810209577%
/Date(1425412855684-0600)/
Volume (Delayed 15m)
:
3638169
P/E Ratio
24.884374451144545Market Cap
230650569823.645
Dividend Yield
3.0283496059287143% Rev. per Employee
692110More quote details and news »PGinYour ValueYour ChangeShort position
(PG), a deal whose announcement last year sent Diamond shares to an all-time high of $92 by mid-September. That's when The Wall Street Journal reported farmers' complaints that Diamond had shifted around the timing of its crop payments in ways that inflated company earnings and boosted the price of shares Mendes had hoped to use for acquisitions like Pringles. Last week, a "disappointed" P&G said it was considering its next move.

The debacle has erased nearly all of the $1.5 billion in market value that Mendes' growth wizardry had added since Diamond's 2005 initial offering at 17 bucks. Mendes became a minor celebrity with fans like CNBC's Jim Cramer, who had the CEO on the show. And the week that Barron's was preparing a story on Diamond ("Getting to the Nut of the Problem," Nov. 7, 2011), Mendes was a scheduled headliner at the annual investor bash hosted by money manager Ron Baron at New York's huge Metropolitan Opera House. Mendes never showed for that November celebration, also featuring Sting and James Taylor, after Diamond had announced the start of its audit committee inquiry.

Diamond Foods' shares were above $46 when we detailed the accounting questions raised by short-selling researchers like Mark Roberts of the Cambridge, Mass.-based Off Wall Street Consulting Group. Roberts now figures that Diamond's earnings for the fiscal year ended July 2011 will get restated from $2.61 a share to $1.39. "This shows the value of short-selling," says Roberts, "not just for hedge funds to make money, but also for the overall health of the financial system."

-- Bill Alpert

Still Bearish on Buffalo, Noshing on Crow

Chicken wings were on the menu during last weekend's Super Bowl contest, but around here we are eating crow. That's because shares of
Buffalo Wild Wingsbwld -1.3545940892328467%Buffalo Wild Wings Inc.U.S.: NasdaqUSD189.922
-2.608-1.3545940892328467%
/Date(1425412573919-0600)/
Volume (Delayed 15m)
:
116355
P/E Ratio
38.183098591549296Market Cap
3645940639.76349
Dividend Yield
N/ARev. per Employee
47830.4More quote details and news »bwldinYour ValueYour ChangeShort position
(ticker: BWLD), the subject of a skeptical story in last week's Barron's ("Time to Play Chicken with 'Wings'"), soared 20% on the week, to $82.85, after the Minneapolis-based restaurant chain reported stellar quarterly earnings. Management also said same-store sales rose in the first six weeks of 2012 by 12.9% at company stores and 10.8% at franchised units.

Our story raised questions about Buffalo's ability to offset soaring chicken-wing prices, and posited that the company would lower this year's earnings guidance. We still expect that to happen, but how 'bout seconds on that crow, please? Buffalo maintained its full-year target of 20% earnings growth.

A peek behind the latest numbers is illuminating and somewhat reassuring. Buffalo said about 3% of the sales surge came from increased sales of gift cards in the 2011 holiday season, while Howard Penney, an analyst at Hedgeye Risk Management, said balmy winter weather could have chipped in another 2% to 3%. If sales growth slows to around 6%, cost inflation in wings will be tougher to overcome. Penney still has a Sell rating on the stock, which now fetches 26 times this year's expected earnings.

The current quarter is the first in which Buffalo will see a year-over-year increase in wing prices. In the fourth quarter wings were going for $1.42 a pound at the wholesale level, down 5% from the prior year. At a recent $1.92 a pound, however, wings were up 90% from last year's $1.01. Traditional wings account for about 20% of the company's sales, and other costs are rising, as well.

Buffalo says there are a number of steps it could take to offset wing-price increases, including cutting expenses and raising prices. It also will benefit from a 53rd week this year.

It's a "wait and see" situation for the next couple of weeks as to whether wing prices "fall off," CFO Mary Twinem said on a conference call with analysts. She added that the company will be able to talk in April about "what the market has done" and whether or not "menu-price increases are in our future."

So enough of crow. Our thesis just might take longer than expected to hatch.